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Possibilities
Frontiers
Antu Panini Murshid-Principles of
Macroeconomics
Todays Agenda
A simple two-good
model of production
Production
possibilities
frontiers
Use PPFs to
illustrate various
concepts
Slope of the PPF
Examples
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Scarcity
Efficiency /
inefficiency
and
unemployment
Opportunity
cost
Economic Growth
Concave PPF
Linear PPF
Production
Possibilities Frontier
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Production
Possibilities in a
Two-Good
Economy
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Attainable and
Unattainable
Production
Possibilities
frontier
3,000
Quantity of
Computers
Produced
Quantity of
Cars Produced
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1,000
All points on or
inside the
frontier are
attainable
Point A is
attainable, so is
point B. In fact
B is better!
Point C is
unattainable
5
Illustrating Concepts
Using a Production
Possibility
Frontier
Scarcity
Efficiency, Inefficiency and
Unemployment
Opportunity Cost
Economic Growth
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Scarcity
3,000
C
B
Quantity of
Computers
Produced
Quantity of
Cars Produced
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1,000
Production
possibilities are
bounded
Efficiency,
Inefficiency and
Unemployment All points on the
3,000
Quantity of
Computers
Produced
Inside the
frontier!
Quantity of
Cars Produced
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1,000
Unemployment
Inefficiency
8
Opportunity Cost
3,000
Not Possible!
B2 C
2,000
B1
1,500
Quantity of
Computers
Produced
Economic GrowthLong
Run
4,000
Over time an
economy can grow
3,000
Quantity of
Computers
Produced
Quantity of
Cars Produced
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1,000
1,500
Economic GrowthShort
Run
Consider an economy at
point A
3,000
B
Quantity of
Computers
Produced
Quantity of
Cars Produced
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1,000
Recession
High unemployment
Unemployment falls,
output increases
But production
possibilities are
unaffected
11
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12
3,000
As we move up
the PPF its
slope decreases
Suppose we go from A to
B. Production of cars is
virtually unaffected,
but production of
computers falls by 750!
Quantity of
Computers
Produced
750
B
0
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250 Quantity of
Cars
Produced
1,000
Computer manufacturers
are lousy at making cars
PPF is steep
Suppose we go from C to
D. Production of
computers is virtually
unaffected, but
production of cars
decreases by 250!
Linear PPFs
3,000
Quantity of
Computers
Produced
Slope =
Y/ X
Slope at
A A
equals
Slope at B
B
X
Quantity of
Cars Produced
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1,000
Marginal Rate of
Transformation
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15
Measuring the
Opportunity Cost
3,000
2,400
Quantity of
Computers
Produced
Slope =
Y/ X
600
X
0
200
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800 1,000
Quantity of
Cars Produced
What is the
opportunity cost of
producing cars?
Pick any two points
on the PPF
As we move from A to
B
DY = -1800 and
DX = 600
Slope = -1800/600 =
-3
O/C of 1 car is 3
computers
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Summary
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